Tai Cheng, vice-president of communications and government affairs for Neucel Specialty Cellulose, said the company is forging ahead with new...more

Tai Cheng, vice-president of communications and government affairs for Neucel Specialty Cellulose, said the company is forging ahead with new investments at its Port Alice dissolving-pulp mill. Neucel was purchased in 2011 by the Fulida Group, a major Chinese textile producer.

Photograph by Wayne Leidenfrost, PNG

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Tai Cheng, vice-president of communications and government affairs for Neucel Specialty Cellulose, said the company is forging ahead with new...more

Tai Cheng, vice-president of communications and government affairs for Neucel Specialty Cellulose, said the company is forging ahead with new investments at its Port Alice dissolving-pulp mill. Neucel was purchased in 2011 by the Fulida Group, a major Chinese textile producer.

VANCOUVER — After investing millions of dollars in a British Columbia pulp mill, the Fulida Group, a major producer of textiles in China, is facing some tough issues on both sides of the Pacific.

Fulida purchased the Neucel pulp mill at Port Alice on northern Vancouver Island in 2011. It was Fulida’s first pulp investment in North America. The textile manufacturer wanted to secure a supply of a specialty dissolving pulp, which is used in making everything from the screen on your cellphone to rayon clothing.

But Neucel’s specialty pulp has been included in an anti-dumping claim by the Chinese government against North American and Brazilian producers. It could level the playing field globally or it could hurt individual companies, depending on how the duty would be applied.

Further, in B.C., as a new player in the forest sector, Neucel doesn’t have a forest licence. That places it at the mercy of domestic markets for the hemlock wood chips used in its specialty pulp products. Chip prices are climbing in tandem with lumber, a side-effect of the U.S. housing recovery.

The squeeze between uncertainty over costs in B.C. and over prices in China is manageable, said Tai Cheng, vice-president of communications and government affairs for Neucel.

But it illustrates how this province’s resource economy is subject to new pressures as it shifts from dependence on the United States to new and growing markets in Asia.

B.C. is still a province dependent on its resources. And China is the fastest-growing market.

“Other than seeing the odd vessel pulling out of the port here in Vancouver, one could be forgiven for forgetting that we actually are a resource economy; that 75 per cent of what we export in goods to the rest of the world still comes from our natural resources,” said Jock Finlayson, chief policy officer at the Business Council of British Columbia.

In the last decade, B.C. exports to China have grown sixfold, from $920 million in 2003 to $5.75 billion in 2012. In comparison, exports to the U.S. have fallen from $18.8 billion to $13.8 billion. China-bound exports have more than accounted for the decline in U.S. exports.

Most of the China trade growth has been in natural resources, which — at $4.95 billion — accounts for 83 per cent of all B.C. exports to China.

Forest products and coal top the list of resource exports. Shipments of both commodities to China have grown more than 20-fold in the last decade.

And even though growth of the Chinese economy is slowing, the projected growth rate of six to seven per cent means there will be continued growth opportunities for B.C. resources, said Finlayson. That six to seven-per cent growth rate is taking place in an economy that is now the second largest in the world, he said.

The emergence of China has brought massive change at every level of the province’s resource economy. New players, like Fulida and Chinese-owned Paper Excellence have come into B.C., reopening mills that had been shut down and written off by the B.C. industry during the economic downturn.

And existing players from lumber producer Canfor Corp. to Teck Resources are increasing their exposure to China.

“China is not as large as the U.S. market for lumber, but it is where the growth is. Of course, if we hadn’t had China come on-line in 2009, 2010, we would have had a completely different situation for the Interior lumber producers,” said David Elstone, forest industry analyst at ERA Forest Products Research, referring to the collapse of the U.S. economy.

“If the Chinese were to stop buying today, the North American market would be in massive disarray.”

China plays an equally large role in mining. The Chinese sovereign wealth fund China Investment Corp. bought a $1.7-billion stake in Teck four years ago, giving it a 17-per-cent equity interest in the mining company. It’s an investment that’s enabled Teck to form important business relationships in China.

Teck now has offices in both Beijing and Shanghai and is betting big on China’s continued demand for resources.

“We at Teck keep a really close relationship with China and that’s for one reason,” Teck president Don Lindsay said at a B.C. mineral exploration conference last January. “It’s that no matter where we are investing, whether it’s here in B.C. or in Chile ... it’s an investment in China.

“Unless we had good confidence in China, we wouldn’t be making the investment.”

Teck is North America’s No. 1 producer of steelmaking coal, shipping about 27 million tonnes of coal this year to mostly Asian markets through both Vancouver and Prince Rupert.

At a recent conference on Canadian mining sponsored by Bank of America, Teck chief financial officer Ron Millos noted that steelmaking coal accounts for half of Teck’s gross profit.

Global markets are focusing on the lower percentage growth in China, Millos said, but despite the slower rate of growth, absolute demand is double what it was eight to 10 years ago.

“That absolute growth is what drives the demand for the commodities that we produce, primarily copper and metallurgical coal,” he said.

Asia is now firmly the growth centre for B.C. resources, according to Elstone.

“As British Columbians, 20 years ago, we would have been dependent ultimately on what happened in the U.S. market. But that has changed dramatically,” he said of the rise of China.

The Chinese government is also shifting its focus from an economy driven by manufacturing for export to providing goods and services to its own domestic market. That should result in continued growth of trade to China, according to B.C. resource companies.

The promise of continued growth is what’s spurring the optimism in B.C. Despite the risk of an anti-dumping duty, Neucel is forging ahead with new investments at Port Alice, according to Cheng. The Fulida Group is not making the amount of investments public, but the company’s confidence in the B.C.-China trade connection has kept its Port Alice operation running and the town of Port Alice alive.

Almost 80 per cent of the pulp produced by the mill’s 350 workers goes to China.

Fulida, which is mainly a textile manufacturing company, had a twofold strategy in moving into B.C., Cheng said.

“The largest motivation was that they saw an opportunity to integrate a vertical portion of their supply and there was also an interest in expanding internationally.”

Fulida is the largest rayon manufacturer in China and one of the largest textile manufacturers in the world. It is headquartered near China Textile City, a huge textile distribution centre covering thousands of hectares on Hangzhou Bay, a metropolitan area of 21 million people southwest of Shanghai.

The Neucel mill makes a grade of pulp that Fulida remanufactures into rayon, and then into clothing. Port Alice has a competitive advantage over other North American mills as ships can load at the mill and sail directly to ports in China. “We supply a small portion of the viscose Fulida requires,” said Cheng. “They still go out and buy many, many more tonnes of this product.”

Rayon-grade pulp is not necessarily Neucel’s main product. Prices for each grade of specialty pulp varies, and production of each grade is based on demand.

Other specialty pulps are shipped elsewhere in China, mostly to Shanghai and from there to the Guangdong basin, where they are used for making everything from acetate to LCD screens and cigarette filters.

At lumber producer Canfor Corp., president Don Kayne said he believes the shift in focus to developing a consumer economy in China will lead to a doubling of Canfor’s exports to China over the next five years.

Total B.C. wood-products shipments to China have grown from $58 million a year in 2003 to $1.358 billion in 2012 — almost a 25-fold increase. Lumber accounts for one quarter of the province’s $5.7 billion worth of exports to China, according to provincial government statistics.

Canfor was an early pioneer in developing a market for its lumber products in China. Initially, Canfor was shipping mostly low-grade lumber used for concrete forms and scaffolding, but, said Kayne, the company spent those early days understanding the country and developing distribution channels. Canfor even operated a trade school at Shanghai where students learned about wood-frame construction.

Canfor’s trade relationship matured in tandem with a co-ordinated trade initiative involving other Canadian wood-products companies, associations, and the federal and provincial governments.

By 2005, those efforts were starting to pay off as China became disenchanted with issues affecting its supply of Russian wood, such as export taxes.

Canfor now counts on China for 25 per cent of its revenues.

The company initially opened an office in Hong Kong, where it could more easily create a business entity called a wholly owned foreign enterprise than it could in mainland China. But as the mainland market evolved, Canfor made the decision to move its office to Shanghai, where it now has a staff of six.

“We really wanted to be very clear with the Chinese that we were serious about our investment and our belief in the Chinese market,” said Kayne.

B.C. exports to China, 2012

Wood products $1.358 billion

Pulp, paper products $1.694 billion

Metals, minerals: $516 million (Copper is main export at $487 million)

Energy: $1.391 billion (Coal is largest at $1.385 billion)

Fruit and nuts: $3 million

Those major resources account for $4.962 billion of $5.752 billion total B.C. origin exports to China. Agriculture, food and fish add another $322 million.

B.C. exports to Hong Kong, 2012

Fruit and nuts: $18 million

Other agricultural food:$26 million

Fish: $44 million

Pulp and Paper: $38 million

Machinery: $25 million

Mineral Products: $20 million

Lumber: $16 million

Those resources account for $187 million of $219 million total B.C. origin exports to Hong Kong.